Just over a month ago, Imagination Technologies dropped the bombshell announcement that their largest customer, Apple, would be phasing out their use of Imagination’s GPU IP in their SoC GPU designs. Specifically, Apple expects that they will no longer be using Imagination’s IP for new products in 15 to 24 months. This put Imagination in a significant pinch, as Apple is a full half of the company’s overall revenue and 69% of their GPU revenue. As a result, Imagination stands to lose the bulk of their GPU revenue starting two years down the line.

At the time the company announced that they would be engaging with Apple to discuss “potential alternative commercial arrangements” to the companies’ current agreement, and now a month later, Imagination has published a further update on that. Discussions in the last month have not made what Imagination considers satisfactory progress, and as a result they are escalating the discussion to go through the dispute resolution clause of their current contract.

Just what this will entail is unknown since the contract isn’t public, but as Imagination so delicately puts it, they’re seeking to reach an agreement with Apple “through a more structured process.” It’s unknown what will happen if this process fails, but for the moment it does not appear that a further escalation is off the table. If nothing else, Imagination will have the option of taking Apple to court for patent and IP violations once the current agreement expires. Though the company is also making it clear that they’d rather not go that far; it’s hard to imagine Imagination wants to go toe-to-toe with the most valuable company in the world, especially once their revenue takes a significant hit.

Meanwhile in Imagination’s bombshell of the month, alongside today’s Apple update, the company is also announcing that they are going to be refocusing the company to focus entirely on the GPU business. To that end, the company is putting their remaining non-GPU businesses – the MIPS CPU business and the Ensigma communications business – on the market. Imagination is not listing an expected price for either business at this time – or if they have already lined up any suitors – but the company believes that given the improved fiscal performance of these two divisions, that they are in a good position to sell the two divisions.

MIPS and Ensigma have been two of Imagination’s major efforts to diversify the company away from their original core business of GPU IP. MIPS was acquired by Imagination for $60M $100M in 2012 – about 4.5 years ago – while Ensigma has been part of the company since the turn of the millennium. MIPS in particular has been a long-running architecture in the embedded space, and along with x86, is the other alternative CPU architecture supported by Google’s Android OS. So the news that the engineering team and product portfolio behind the #2 architecture in mobile and embedded are being sold is a major development. MIPS and Ensigma are now joining Imagination’s Pure business, which is also in the process of being sold off.

In announcing this latest sale, Imagination noted that they are doing this to strengthen their balance sheet. At the risk of reading too much into a short fiscal statement, this doesn’t sound like a move that they are making with gusto, but rather something they have to do to save the company. Selling these divisions means that the company’s efforts to diversify have failed, but given their situation, it appears that focusing on their core competency is their best bet. Still, it does risk certain efforts in the long-term, such as Imagination’s OmniShield virtualization security technology, since that was a synergy play between owning both CPU and GPU IP.

As for Imagination’s GPU business, the sale of MIPS and Ensigma means that Imagination will be transitioning to a pure-play GPU IP provider. The company continues to develop new IP here, including the recent Furian architecture, so they have products. The question that remains is how they will survive (and ideally thrive) a post-Apple world; even if the companies sign a new agreement, Imagination’s fate is going to be based on how well they can sell GPU IP to the remaining SoC vendors, particularly in the STB and Android mobile spaces. With all other businesses in the process of being sold, the fate of Imagination’s GPU business will determine the fate of Imagination itself.

We saw that with Good technologies. They put their company on the block. They got an offer for almost $1.2 billion, but turned it down because the CEO said the company was worth more. Last year, Blackberry bought it for $600 million.

When you look at the small sales numbers of Imagination, and their asking price, you see that their heads were in the air. In order for Apple to have bought the company, they would have had to do things that would have made the company worth far less.

So, Imagination is now doing some of them. They're selling off everything they bought to diversify, things that would make no sense for Apple to have. But Apple would need to cut the other customers loose too. So the only income that Imagination would have was the 69% of the graphics licensing. So the graphics licensing was about 70% of the company's total sales. Of that Apple had about 50% of the company's total sales, most of the graphics revenue - 69%.

So after selling all of the stuff they bought, and getting rid of the other customers, what would be left? Well, a fraction of what the company was before, Apple's business would be all, is there any surprise Apple didn't accede to their price demand?

So, at their high , they were worth $960 million. That's awful high for a company whose highest sales were in 2014, at $170 million, with a slight loss. Now, it's even crazier. Last year's sales were down to $120 million, and they had an $80 million loss. How are they worth anything near $960 million? And this was before Apple told them they were leaving, and the stock dropped by more than half.

Normally, a company sells for close to a 30% premium to their current worth at the time of the offering. But that assumes the company is doing well. Imagination was, and is, NOT doing well. There was no way Apple would, or should have, paid a $ billion for this wreck. Maybe they were actually worth $200 million - maybe.

The fact is that they can't survive without Apple's revenue, unless someone else buys them. Currently, they are "worth" about $400 million, and I don't know why.Reply

If this was a conventional business in say, manufacturing, you'd be right. They have value far above their balance sheets. Why? Because other tech firms value their IP. They're refocusing on their GPU designs, which is probably the best decision they could make in their position. If they can release great new designs (again) and win contracts, they may succeed. If they fail, someone will snap them up for more than what YOU think they're worth at the time, because of their IP. QC, Sammy, etc would all be interested... Apple might even do it for the right price just to protect themselves from future lawsuits.Reply

The problem is that what you're saying isn't correct. Apple is 70% of their graphics business. Didn't you read that? Despite their attempts, over the past few years, to get more customers for their graphics designs, they've failed. In fact, except for Apple almost none of their other customers are licensing their higher end products.

So how are they going to convince their other current customers, and those not customers, to license their high end designs, where they make more money, or to even continue licensing any of their designs?

And they aren't "refocusing" on their GPU designs. That's been the main focus of the company even after their acquisitions. But now, they'll have far less funds to spend on R&D.

And, if some company does pick them up after the stock falls further, then they're gone anyway.

Really, I read things people write about "all they have to do is...". Well, if that's all they had to do, they would have done it already. You're comments aren't based on reality.Reply

You clearly did not read my post. I never said "all they had to do is X". I said that IF they can release great new designs and win contracts, they MAY succeed. Either way it's clear you don't understand why they're selling their other divisions. The company currently splits its R&D resources across multiple divisions. If they manage to sell those non-core businesses they'll have an influx of cash and will be able to devote their entire R&D efforts on graphics. It's a gamble, but given the loss of Apple's business if they do nothing they will eventually fail by default. They have to try. If you comprehend nothing else, comprehend that. Also their MIPS SoCs are a competitor to ARM designs. It's a lot easier to convince ARM manufacturers to use your GPU IP if you're not competing with them in other sectors.

Either way they're still worth more than you believe, I'm frightfully sorry you don't understand the value of tech IP.Reply

GPU design cycles last years. That cash influx needs to keep R&D afloat long enough to get new designs out for 2020/21. In the mean time to generate new income they NEED new contracts to fill that void. IP licensing is probably not going to fill the shortfall to the the bottom line. Going after the Chinese phone makers might help.Reply

They were probably charging a "lets be apple" type of pricing for their more powerfull designs. That's why we only saw cheapo socs with powervr gpu on some mediatek phones/tablets before mediatek switched to ARM own's mali gpu.Reply

I think this is a very good analysis. I can not understand why you would go down the route of selling your plan B in this situation if it was even barely profitable on it's own. This firm will be cut up into it's various IPs and sold at auction, likely by liquidators. Their only route to success is to create amazing new IP that everyone wants but you can bet that the best people who are most likely to do this are already looking for new work / being poached.Reply